The 28th Annual ROTH Conference included presentations and panels featuring ~50 publicly-held and private Consumer companies across the Active Lifestyle, Apparel, Brand Management, Consumer Electronics, Food & Beverage, Healthy Living, Infant & Juvenile, and Restaurants subsectors. Today’s report addresses individual Active Lifestyle-related takeaways, including sporting goods segment challenges at retail, exposure to TSA’s recent bankruptcy, M&A plans, and trends exhibited by Millennial Moms.
- Challenging Retail Trends In Certain Sporting Goods Categories. Performance Sports Group has experienced a drop-off in baseball orders due to retailer concerns about industry discounting following recent retail bankruptcies and high in-stock levels following weak consumer Holiday demand after two strong years in bats. In response, management is now increasing the frequency of feedback from its large sporting goods customers. On the other hand, Escalade’s traditional sporting goods business continues to perform, while its archery segment may not recover until 2H16 following the launch of new crossbow products.
- Managing Exposure To TSA. Much of the discussion centered on the recent bankruptcy of The Sports Authority, the potential for lost revenue, and credit exposure. Escalade noted ~$700,000 ($0.03/share) in credit exposure net of ~$900,000 in bad debt reserves and believes its revenue is replaceable over time given distribution at other top retailers. PSG previously disclosed $0.09/share in exposure including credit charges and lost revenue, while Gaiam recently recorded a $0.02/share charge that includes its expected credit risk. Delta Apparel noted roughly $200,000 ($0.02/share) of credit exposure, given its pay-by-scan model for the Soffe brand and already-declining revenues from TSA amidst growth at Dick’s.
- Mixed M&A Plans. Most presenters noted a still frothy M&A environment with high multiples. Escalade is likely to remain on hold over the next several months as it integrates three recent transactions, while PSG is likely to focus internally given high levels of leverage. Vista Outdoor continues to push into outdoor segments as it diversifies away from ammunition and seemingly sees itself more like a Jarden than a Black Diamond among companies that have already pursued this strategy.
- Active Lifestyles & Athleisure Wear Still Highly Popular With Millennial Moms. Following up on our 2015-2016 ROTH Millennial Mom Survey of 1,000 millennial mothers, our Millennial Mom Panel featured 12 affluent mothers from across the local region and ranging in age from 28 to 34. The vast majority of our panelists noted exercise as “extremely important” for their families, belonging to a gym, and frequent visits to fitness boutiques like Barry’s Bootcamp and SoulCycle. Nearly all wear athleisure apparel regularly and most still favor Lululemon over other options.
- Brand Panel Highlights. Our Building Your Brand In 2016 panel featured global skateboarding icon Tony Hawk, Hawk brand-owner Cherokee’s (CHKE-Buy) CEO Henry Stupp, and PSG Brands President Amir Rosenthal, among others. Panelists highlighted the importance of authenticity and consistency of brand, benefits of brand-building retail locations, and the importance of disciplined brand ambassadors.
- Specific Stock Highlights. We continue to recommend PSG despite the company’s recent challenges, as shares now seem to be pricing in the risk of debt default, accounting concerns, and questions surrounding management’s credibility. We are not significantly concerned near-term about PSG’s debt burden and extremely high leverage, given no meaningful covenants and sufficient EBITDA to cover interest expense through maturities in 2019 and 2021. Escalade shares could trade higher given more meaningful institutional investor interest, though fundamental improvement is more likely to occur in 2H16. Meanwhile, GAIA’s upcoming TV business spinoff could unlock underlying share value.
